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1914
FIFTIETH A N N IV ER SA R Y
1964
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MONTHLY REVIEW
O C T O B E R 19 6 4
Contents
Monetary Policy and a Liberal International
Economy: An Address by Alfred Hayes .
The Business Situation ..................................
The Money Market in September...............
International Monetary and Financial
Developments ............................................
Federal Reserve Anniversary Year—
Naming of Reserve Banks as Treasury
Depositories and Fiscal Agents...............
FEDERAL RESERVE BANK OF NEW YORK
187
M onetary Policy and a Liberal International Economy*
By A l f r e d H a y e s
President, Federal Reserve Bank of New York
It is indeed a privilege and pleasure for me to be with
you today. With our nation’s attention increasingly turned
to contacts with other nations, I particularly welcome an
opportunity to comment on the underlying philosophy be
hind our commercial and financial relationships, and on
the important role of monetary policy in helping to achieve
our economic goals. It is all too easy in a world where
each day’s news may bring fresh problems, and needs for
adaptations of policy, to lose sight of the broad guidelines
that we would like to follow, and it is to these objectives
that I would like to direct your attention today.
I think it would be generally agreed that, by and large,
the international economic ideals of the Free World since
World War II could be regarded as “liberal” in the best
sense of the term. Under the leadership of the United
States and the other major industrialized nations, there
has been a more or less consistent pursuit of greater free
dom of international trade and international investment.
The autarkic and restrictive record of the thirties con
vinced most thoughtful people that the road to world
economic progress lay in the opposite direction; and even
before the end of World War II the foundations for a
“liberal” economy were being built through such farsighted
innovations as GATT, the International Monetary Fund,
and the World Bank.
Two decades have passed since these beginnings, and
as we look back on the vast growth of economic well-being
in the Free World during this period we can hardly fail
to feel much satisfaction. The record among individual
countries has varied widely, both in the extent of economic
growth and in the methods used to achieve it; thus, with
respect to the domestic economies both the proponents of
free enterprise and the backers of “dirigisme” can point
to considerable success. But as far as international eco
nomic relationships are concerned, the postwar develop
ment has been unequivocally in the direction of greater
freedom and the abandonment of controls inherited from
the war and prewar years. At the same time, world trade
and international investment flows have grown enormously
—at a pace far exceeding that of most individual domestic
economies. This growth has been most heartening, and I
am confident that there is ample opportunity for further
progress.
The financial background for these remarkable eco
nomic gains is fairly clear. Gold has continued its centuriesold role of providing a highly convenient basis for mone
tary values; and the dollar, tied firmly to gold at the fixed
price of $35 per ounce, has been a most useful partner
for gold, together with sterling, in providing monetary re
serves needed to support the far-flung structure of world
trade and payments. As I have pointed out on other oc
casions, the key role of the dollar as a reserve currency is
not something deliberately sought or created. Rather it has
been the inevitable result of the American economy's
strength, and the usefulness of the dollar as a medium of
international payment and as a standard against which other
countries could measure their own currencies.
When we examine the nature of our progress toward
greater freedom of world trade and payments, we must
admit that it is not a matter of smooth and uninterrupted
gains. Belief in such continuous progress could lead only
to disillusionment. If we are to maintain a levelheaded view
and if we are to retain our faith in ultimate progress, we
must recognize that forward steps are interspersed with
backward steps and that at any one time there are con
flicting forces and crosscurrents at work. Often the great
* An address before the eighth International Forex Congress at advances in themselves create problems which may cause
remedies to be sought in a restrictive direction—but what
the United Nations, New York City, October 3, 1964.
m
MONTHLY REVIEW, OCTOBER 1964
counts is the net result of all these forces, which we hope
will continue to be expansion rather than the reverse.
The achievement of currency convertibility some six
years ago was an example of a great advance leading to
some problems and some restrictive countermeasures. Con
vertibility made possible, for the first time in many years,
large-scale movements of short-term funds from country
to country; and these movements could, and occasionally
did, reach a size great enough to threaten the stability of
one or more major currencies. Even the dollar was not
immune to such threats. The flows of funds also frequently
interfered with the current domestic objectives of the
monetary authorities, and this at a time when monetary
policy was taking on greater importance in country after
country. In the classical economic model, the answer to
excessive international flows lay in monetary counter
measures; but classical economics reckoned without the
kind of conflict between domestic and international objec
tives that has become so active and sharp in these post
convertibility years in both the United States and Europe.
Hence an urgent need arose for reviewing the techniques
of monetary policy to see whether both domestic and inter
national needs could be served at once: and, as the possi
bilities along these lines were necessarily limited, there
was a new impetus to finding an appropriate “mix” of
monetary and other general governmental financial poli
cies, notably fiscal policy. But in addition there was some
recourse to specific restrictions on capital movements to
help to keep them within bounds.
The other avenue of response to the problems emerging
in the wake of convertibility took the form of a tremend
ously improved and intensified system of cooperative
measures entered into by central banks and treasuries,
either bilaterally or on a collective basis. The history of
this cooperation has been written so fully that I need not
go into any detail—least of all before this sophisticated
audience—but it did effectively remove the threat that
short-term capital movements might unleash speculative
forces sufficiently strong to undermine some of the ma
jor currencies. Fortunately, the monetary authorities most
active in constructing these lines of defense never lost
sight of the fact that cooperative extension of credit does
not solve a payments imbalance but merely provides time
in which orderly forces can be marshaled to achieve a
basic remedy. I should add, at a time when international
liquidity is receiving so much attention, that in the Fed
eral Reserve Bank of New York we have consistently felt
that the most promising approach to adequate liquidity in
the future lies in the further development of international
credit facilities, both short and medium term and both
bilateral and multilateral, along the lines clearly marked
out in the last few years. The proposed 25 per cent in
crease in IMF quotas, for example, is a useful and appro
priate step in keeping up with the growing volume of
world trade and payments, and expanding needs for
liquidity.
So far I have been speaking of problems that would
have arisen even in a postwar world characterized by
basic equilibrium of international payments. But in fact
the problem has been greatly complicated by the emer
gence around 1958 of a large United States deficit and
a similarly large— and related—European surplus. The
reasons for this disequilibrium are hard to disentangle
in any precise fashion—but I would number among the
primary causes: (1) the remarkably vigorous recovery
and advance of the European economy, partly as a result
of massive American aid; (2) the unavoidable assumption
of major responsibility by the United States for military
leadership in the postwar world, plus major responsibility
for assistance to the less developed countries; and (3)
insufficient attention in the United States of the 1950’s
to the importance of keeping United States costs and
prices highly competitive in an increasingly competitive
world. Indeed there was a sublime overconfidence at that
time on the part of Americans in the dollar’s immunity
to balance-of-payments problems. And we were not alone
in our illusions; all of you can remember the days when
the “intractable dollar gap” was believed in even more
fervently abroad than in our own country.
Perhaps we should include among basic causes of the
disequilibrium the avid interest in foreign travel of an
affluent American society, the quite understandable wish
of American industry to preserve and extend its activities
abroad through direct investment, and the natural attrac
tions of the huge American capital market, fed by a vast
flow of savings, to all the potential borrowers in a rapidly
growing world economy. Movements of short-term capital
should perhaps not be regarded in quite the same light as
other segments of our deficit, but it must be remembered
that any sizable outflows of short-term capital, such as
we have had during recent years, are a continuing serious
problem when these outflows are superimposed on an
already large underlying deficit.
Efforts to reduce the United States payments deficit
have made notable progress in some directions, but we
still have a considerable way to go before we reach equilib
rium. There is no doubt that the payments problem is
still serious—requiring intensive remedial efforts on the
part of the United States Government and American
citizens in general.
This is not the time nor place to go into detail on
the many-pronged attack on the United States balance-
FEDERAL RESERVE BANK OF NEW YORK
of-payments deficit that has been undertaken and inten
sified in the last few years. Of primary importance has
been the achievement of stable costs and prices, in con
trast to the marked inflation of costs and prices in most
European countries. It would be my hope that over the
next few years we could not only maintain but even
improve on this record of stability by achieving some
reduction in costs and prices. Indeed, in some industries
where productivity gains have outpaced wage increases
there have actually been unit cost reductions. We have
yet to see the follow-up in the form of price cuts on any
significant scale, but I can think of no more potent method
of working toward basic international equilibrium, while
at the same time providing our own consumers directly
with some of the fruits of over-all productivity gains.
Unfortunately, recent wage settlements warn us not to
generate overoptimism on this score, however, and we
shall have to work harder than ever to maintain the
record of stability of the last few years.
The Government has made a good start in attacking
the balance-of-payments deficit through a reduction of
net military outlays abroad. Much has also been done
through the tying of the largest part of our economic aid,
but it should be recognized that tying is no final answer
since aid funds may merely be substituted for other
sources of exchange in many instances. With regard to
the aid question, I feel that there is a valid case for
greater sharing of these burdens by European countries
enjoying a surplus in their international payments—for
even if per capita wealth is the most important criterion
for burden-sharing, this is no reason to ignore the
balance-of-payments aspects as an additional basis for
sharing, just as the transfer problem loomed very large
in our own early postwar assistance programs. Moreover,
there are weighty reasons for a better sharing of aid,
which transcend balance-of-payments considerations alto
gether—in terms of broadening the base of Free World
cooperation.
The other two principal lines of attack on the payments
problem have been (1) monetary policy (together with
some considerable assistance from debt management and
fiscal policy) and (2) direct measures to influence the
volume of long-term capital outflows. Whether monetary
policy has done its part adequately is, of course, a ques
tion to which there is no agreed answer. There are those
who tend to attribute our payments deficit almost entirely
to an excessive creation of credit and money, but there
are also those who argue that preoccupation with our
international deficit has produced an insufficiently easy
credit policy, not responsive enough to the needs of the
domestic economy.
189
1 would have to reject both of these extremes. I would
not be so immodest as to contend that our policy has
been exactly right, but I do believe that through innova
tion and development of varied techniques we have been
able to contribute a good bit to payments equilibrium,
largely by reducing incentives to short-term capital out
flows. Doubtless we could have done more had it not
been necessary at the same time to encourage greater
use of the economy’s unused resources. And this would
be particularly true of our role with respect to longer term
capital flows, for we have been rightly concerned about
too much upward pressure developing on longer term
interest rates—given the great importance of the long
term capital market to the well-being of domestic busi
ness. I should add, however, that the possibilities are not
unlimited for cushioning long-term rates against the im
pact of developments in the short-term area.
Notwithstanding these constraints, I think there can
be no question that monetary policy has made a valuable
contribution to the economic expansion of the past fortyodd months. And that contribution is continuing; bank
reserves, bank credit, and the money supply have con
tinued to grow in 1964 at about the same substantial
pace as in 1963. I can see no evidence that the economy
has been short of required money and credit. On the con
trary, the question could be raised whether continued in
creases on the scale of recent years might not be a little
too generous even from a domestic point of view. On the
international side, the fact that interest rates have been
consistently lower here than in most major foreign coun
tries, the indications of substantial placements abroad of
United States investment funds, the readiness of banks
to lend abroad in large volume and for a variety of pur
poses, and the continuing outflow of short-term capital—
all suggest that a lesser degree of monetary ease can at
any time, if needed, make a significant contribution to
the balance of payments.
The conflict of domestic and international goals is, as
I have said before, more apparent in the short run than
over an extended period, for in the long run a strong
economy and a balanced international position are surely
complementary goals. But this does not prevent a very
real conflict and a need for choice at specific times and
under certain circumstances; and such circumstances have
been all too frequent in recent years, not only in the
United States but also in Europe. Two special factors
have made and will continue to make the problem par
ticularly hard to deal with in our own country: (1) inter
national trade and payments form a much smaller share
of our total national economic activity than in other ma
jor industrial nations, so that many Americans have trou
190
MONTHLY REVIEW, OCTOBER 1964
ble conceiving of any international factor as even ap
proaching the importance of strictly domestic economic
considerations; (2) but at the same time the dollar’s role
as the leading world currency and, more generally, this
country’s role in world affairs require us to give par
ticular weight to international factors in our policy formu
lation.
While the conflict of domestic and international aspects
has been especially troublesome in the United States, it
has appeared in so many major countries in recent years
that there has been a widespread effort to find ways of re
lieving monetary policy from a part of its domestic burden
in order to free it for a role in which it could be obviously
highly efficient and useful—namely, in influencing inter
national capital flows. Hence the emphasis both here and
abroad on finding a better “mix” of monetary policy and
other generalized and “impersonal” national economic
policies, notably fiscal policy. Unfortunately this search
has been up against a serious handicap—the fact that
fiscal policy, although potentially more powerful than
monetary policy as a means of affecting the domestic
economy, at least in this country, is still sadly lacking in
the flexibility needed to make it an instrument of com
parable usefulness. We have only to recall the period of
some two and a half years between the initial moves to
ward a major personal and corporate income tax cut in
this country, and the enactment of the law early this year,
to feel some sense of frustration with the flexibility of
fiscal policy. More than once, and in more than one coun
try, I have heard it said that monetary policy would have
to take on added burdens at a particular time because of
the political difficulty of working effectively through fiscal
action.
I would hope, however, that there would be no letup in
the efforts to find a proper way in each country of making
fiscal policy more flexible and thereby more usable as a
means of achieving over-all domestic goals. One important
reason why I strongly favored the last tax reduction was
the belief that it would free monetary policy to give more
attention to our international responsibilities. That argu
ment is as valid today as it was two or three years ago.
There is evidence that the tax cut is already achieving its
objective. With domestic business going ahead at a very
healthy pace—in part doubtless because of the tax cut—
the Federal Reserve System is clearly in a better position
to use its powers, as needed, in defense of the dollar’s
international strength.
With respect to the remaining avenue of attack on our
payments deficit, i.e., direct influence on capital flows
through selective measures, we are in the midst of an
experiment with a novel variant of such measures, the
interest equalization tax. With the tax so recently enacted,
it is perhaps too early to assess its full effects, although
it has obviously had an important impact on the volume
of new foreign issues in this market. In any case, it is
essential that by the end of 1965, when the tax is sched
uled to expire, we shall have dealt effectively with our
deficit by means which are conducive to expansion of
world trade and investment.
Fundamentally we must recognize that recourse to the
United States market by borrowers all over the world is
a perfectly natural response to heavy capital needs and
limited savings abroad, combined with a great abundance
of savings in this country. Capital flows reflecting such
fundamental economic factors should not be cut too
drastically just because we have a payments deficit, any
more than foreign aid participation should be decided
mainly on balance-of-payments grounds. Of course, there
is the problem of financing such capital outflows, but it is
part of the general problem of our payments deficit and
should not be mistaken for a specialized sectoral problem
that must be solved within the confines of this one sector.
Perhaps the greatest risk of all in selective measures for
influencing capital flows is the danger that they may lull
us into a comfortable feeling that monetary policy can now
relax and focus all its attention on domestic affairs. In my
judgment nothing could be further from the truth. Regard
less of whether selective controls are being used, monetary
policy cannot escape its duties as a partner, and a power
ful one, in our concerted effort on many fronts to rid our
selves of the payments deficit that has persisted for seven
years, imposing such a burden on our energies and our
efforts to promote sound economic growth. Maintenance
of stable costs and prices is probably of first importance
in this concerted effort; and monetary policy must be pre
pared to act promptly and effectively, in the light of un
folding events, both to help preserve this vital cost-price
stability and to bring a better equilibrium in international
capital flows. Monetary policy cannot do this job singlehanded, but I believe that the Federal Reserve System is,
as it must be, ready to do its full part to preserve the
dollar as a source of economic strength at home and as
the financial keystone for the liberal international econ
omy which we all seek.
FEDERAL RESERVE RANK OF NEW YORK
191
The Business Situation
The economy came through the summer months with
few of the signs of hesitation that had marked that season
in 1962 and 1963, and in spite of unsettled labor disputes
in some sectors business was continuing its brisk advance
as the autumn began. Industrial production and retail sales
moved ahead in August, and although nonagricultural em
ployment held at about the July level, hours worked in
manufacturing—particularly in durable goods industries—
moved up. Weekly data for September suggest that steel
production continued to rise, while auto production and
retail sales edged down from their August levels.
It is probably too early to assess the eventual impact on
the economy of the conclusion of labor negotiations be
tween the United Auto Workers and Chrysler and Ford
in September and the signing of a national agreement
with General Motors early in October. The terms of these
agreements, to be sure, included increases in wages and
fringe benefits in excess of the economy’s average pro
ductivity gain in recent years, but the current exception
ally good level of profits in the auto industry, together with
the industry’s above-average rate of productivity increase,
provides a cushion with which to meet the cost increases.
Hence, the labor settlement apparently raises no immedi
ate threat to the stability of automobile prices. Yet, there
is the possibility that similar wage adjustments may spread
to other industries, including those less able to absorb
higher costs. The agreements also have a potential psy
chological impact on pricing decisions and could become
an inducement to increased inventory building. On the
other hand, productivity growth over the past two years
has been unusually rapid for an expansion more than a
year old. The continuation of such rapid growth, while it
should not be taken for granted, would of course be of
substantial help in offsetting the cost-price pressures aris
ing from wage settlements.
While the auto settlements and the sustained economic
advance have served to focus attention on the behavior
of prices, there is still no sign of any immediate change
in the relative stability that has generally characterized
broad indexes of price behavior for several years. The
consumer price index held virtually steady in August, and
the increase in percentage terms so far this year has been
somewhat smaller than the moderate rises in the first eight
months of 1962 and 1963. A decline in food prices was
too small to cause any significant movement in the over
all wholesale price index in August, as average prices of
commodities other than farm and food products held
steady at a level about equal to those prevailing at the
end of 1963 and the beginning of 1964. Weekly data
indicate little change in this broad indicator of indus
trial commodity prices in September. At the same time,
however, prices of some sensitive industrial commodities,
particularly nonferrous metals, pushed up the Bureau of
Labor Statistics index of thirteen raw industrial commodi
ties in September. The advances in this index in recent
months, which have totaled about 11 per cent since the
beginning of the year, partly reflect special supply situa
tions in individual commodities, but may also indicate
some tendency toward generally increased demand pres
sures both in the United States and abroad.
P R O D U C T IO N A N D E M P L O Y M E N T
Industrial production (as measured by the Federal Re
serve’s seasonally adjusted index) rose by 0.8 percentage
point in August, the ninth consecutive monthly gain, to
reach 133.5 per cent of the 1957-59 average (see Chart
I). So far in 1964 industrial production has risen 5 per
cent, about equal to the advance during the comparable
months of 1963. The August gains were widespread;
equipment production registered a rise of 1 per cent, while
output of both durable and nondurable materials advanced.
Automobile production—drastically curtailed by the model
change-over and the lack of any continuation of 1964
model production—actually recorded a small increase,
after a necessarily rough allowance for these seasonal influ
ences. Steel production showed a less-than-seasonal rise in
August, but weekly data point to some seasonally adjusted
advance in September. Auto output declined somewhat in
September, reflecting the General Motors’ strike during
the last days of the month.
Prospects for further production gains remain good,
although a 9 per cent August decline from the record July
level in new orders received by manufacturers of durable
192
MONTHLY REVIEW, OCTOBER 1964
Chart I
RECENT BUSINESS INDICATORS
S e a so n a lly adjusted
B illio n s of d o llars
B illio n s of d o llars
_ N ew orders received by m anufacturers
of durable good s ex clu d in g
transportation equipm ent i
August while unemployment edged up, reflecting primarily
a failure of unemployment among teen-agers to show the
normal seasonal drop. As a result, the over-all unemploy
ment rate increased to 5.1 per cent from 4.9 per cent in
July. In September, a fractional advance nudged the
rounded unemployment rate up to 5.2 percent. Unemploy
ment among teen-agers registered some drop, but the rate
for married men rose to 2.9 per cent. On a quarterly aver
age basis, the unemployment rate in the third quarter was
at its lowest level since October-December 1957.
B U S IN E S S A N D C O N S U M E R S P E N D IN G
While spending for plant and equipment is strong and
expected to show a good advance at least through the re
mainder of the year (see Chart II), business spending for
additions to inventories remains moderate. According to
an August Commerce Department survey, manufacturers
estimate that stocks of goods on hand will rise at a sea
sonally adjusted annual rate of $1.6 billion in the third
Chart II
Sources: Board of Governors of the Federal Reserve System; United States Departments
of Commerce and Labor.
INVESTMENT SPENDING
Seasonally adjusted annual rates
Billions of dollars
goods does provide a cautionary note. Most of the August
fall in orders reflected a sharp drop in the erratic aircraft
orders series; new orders for durable goods excluding
transportation equipment fell only 2.9 per cent in August
(see Chart I). Even at the reduced August level, new
orders continued to run ahead of shipments, and the back
log of orders on the books of durables manufacturers thus
climbed for the eighth month in a row.
Total nonagricultural employment in August held at
about the July level, although in the manufacturing sector
employment (along with mining and construction employ
ment) showed a small decline. Average hours worked per
week by manufacturing production workers, however,
moved up by about Vi per cent to 40.7 hours, seasonally
adjusted. Average hours in the durable goods industries—
at 41.6 hours (see Chart I)—in fact reached a peak for
the current expansion. The increases in average hours
worked may indicate that employers are utilizing existing
employees to the fullest before hiring new workers and also
that the sustained pace of the expansion has quite possibly
now come close to creating labor shortages in some lines.
According to the Census Bureau’s household survey,
total farm and nonfarm employment moved down a bit in
1962
Billions of dollars
1963
1964
Sources: United States Department of Commerce; Securities and Exchange Commission.
FEDERAL RESERVE BANK OF NEW YORK
quarter of the year and by $2.8 billion in the final quarter
(see Chart II). According to the same survey, however,
shipments are also expected to advance over the remainder
of the year at such a rate that the inventory build-up will
serve only to maintain the generally tight relationship be
tween stocks and sales that has characterized the cur
rent economic expansion.
Residential construction activity continues to slip back
from the advanced levels reached earlier in the year. With
some further decline in September, outlays for the third
quarter as a whole— at a seasonally adjusted annual rate
of $26.3 billion—were about 4 per cent below the ad
vanced first-quarter rate (see Chart II) and 2 per cent
below the second quarter. Housing starts declined again
in August, putting the July-August average of starts 14
per cent below the first-quarter rate, while new housing
193
permits issued moved up only slightly from the relatively
low July level.
Apart from housing, the consumer continues to provide
a major push to economic activity. Retail sales, rising al
most 1 per cent in August, reached a record high of $22.1
billion, seasonally adjusted. Sales of automobiles con
tributed substantially to the advance, and dealers sub
stantially cut their inventories of 1964 model cars.
Nondurables sales, particularly apparel, also contributed
to the August advance. Data for the early weeks in Sep
tember suggest that retail sales declined somewhat from
their August record. As noted in last month’s Review,
consumer intentions to buy are reported to be strong and,
with the March tax cut continuing to provide an incentive
for increased spending, further strength in the consumer
sector can indeed be expected.
The M oney M ark et in S eptem ber
The money market remained generally firm in Septem
ber. Federal funds traded predominantly at
per
cent, although there was trading at rates below that
level on occasion. Member bank borrowing from the Fed
eral Reserve Banks was temporarily high prior to the Labor
Day holiday, and after the midmonth quarterly corporate
dividend and tax payment dates which brought relatively
heavy pressures on reserve positions at banks in the leading
money centers.1 Rates posted by the major New York City
banks on new and renewal call loans to Government securi
ties dealers were in a 3% to 4 per cent range during the
first half of the month but most frequently in a 3% to 4Vs
per cent range thereafter.
Offering rates for new time certificates of deposit issued
by the leading New York City banks remained virtually
1 As announced in the August issue of the Federal Reserve Bul
letin, the Board of Governors is now releasing on a weekly basis a
new set of statistics giving information on reserve positions and
purchases and sales of Federal funds by forty-six major moneycenter banks, eight of which are in New York. Certain informa
tion on the financing of Government securities dealers by these
banks is also provided. The Bulletin gives data for the period
September 1959 through July 1964, and subsequent data can be
obtained from the new current release and from future Bulletins.
An analysis of the historical data and other related material will
be published by the Board this fall in a special monograph.
steady, while the range of rates at which three- and sixmonth certificates of deposit traded in the secondary mar
ket edged slightly higher. Several upward adjustments in
the rates of other short-term money market instruments
occurred during the month. Thus, at the end of September,
the major sales finance companies were quoting a 33A per
cent offering rate on 30- to 89-day directly placed paper as
against a 3% per cent rate at the end of August. Similarly,
at the month end commercial paper dealers posted a 4 per
cent offering rate on prime 4- to 6-month paper, compared
with a 3% per cent rate at the end of August.
Treasury bill rates worked irregularly higher in Septem
ber. This trend reflected additions to the supply of bills,
seasonal pressures over the quarterly corporate dividend
and tax dates, and the spreading view that monetary policy
had shifted slightly toward less ease. Dealer holdings of
bankers’ acceptances rose sharply in September, as seasonal
influences brought about increased bank selling of these
instruments and a contraction in demand for them. Rates
on bankers’ acceptances, however, remained unchanged
throughout the month.
The gradual downward drift in prices of Government
notes and bonds which began late in August extended
into early September, as market participants continued to
react with caution to the uncertainties in the balance-of-
194
MONTHLY REVIEW, OCTOBER 1964
payments outlook and auto labor negotiations, to the pos
sibility of rising credit demands over the fall season, and
to the view that a slight shift in Federal Reserve policy
might be taking place. Subsequently, as the distribution
of securities acquired in the July and August Treasury
financings proceeded in an orderly fashion, a firmer at
mosphere reappeared. Prices of coupon issues generally
edged higher from September 16 through September 22,
and then moved narrowly through the end of the month,
In the markets for corporate and tax-exempt bonds, prices
came under downward pressure as underwriters probed for
yield levels at which the month’s large supply of new securi
ties could be distributed. Investment buying appeared at the
higher yield levels and prices were generally firm at the end
of the month.
SAN K RESERVES
Nation-wide net reserve availability averaged some
what lower over the five-week period ended September
30 than in the four preceding statement weeks. On a
weekly average basis, market factors absorbed $292 mil
lion of reserves from the final statement period in August
through the final week of September while System Ac
count operations released a somewhat smaller volume
of reserves. Banks throughout the country increased their
borrowing from the Federal Reserve Banks around the
September 7 Labor Day holiday as they guarded against un
certainties over the long week end. After a brief subsequent
easing, reserve pressures built up on money-center banks
significantly around midmonth during the dividend and
tax period. These banks experienced a runoff of time cer
tificates of deposit as well as expanded loan demand from
business corporations. In addition, finance companies and
Government securities dealers were increasing their
borrowing from banks, as finance company paper matured
and corporate repurchase agreements were terminated.
While the money-center banks were able to cover most of
their increased needs through the Federal funds market,
their borrowing from the Reserve Banks also rose during
the week ended September 23. Subsequently, a shift of re
serves in favor of the money centers led to a decline in
such borrowing, and to the appearance of considerable
ease in the money market around the September 30 re
serve settlement date for "'country” banks.
System open market operations helped to offset most
of the effects of the fluctuations in market factors and re
serve distribution that occurred during September. At the
beginning of the period the System sought to avoid aug
menting the already heavy demand for Treasury bills that
was present in the market and injected reserves mainly
through purchase*, of Treasury notes -and bonds. The
CHANGES IN FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, SEPTEMBER 1964
In millions of dollars; (4) denotes increase,
(—) decrease in excess reserves
Daily averages—week ended
j
|
Factor
Operating transactions
Treasury operatio n s*................
Federal Reserve float . . . . . . .
Currency in circulation...........
Gold and foreign a ccou n t.. . .
Other deposits, and
other Federal Reserve
accounts (not)f .................. ..
Total___ . . . .
Sept,
2
Sept.
9
i Sfept.
!
i
4 74
— 263
—
8
— 19
?
4 -1 1 2
-2 3 X
4 - 33
! i — GO
283
:
I - 1S2
-f
12
—
— 210
Federal
Direct
Reserve credit
transactions
Open market operations
Purchases or sales?
Government securities
! -f-3515
Bankers' acceptances----- | —
1
Repurchase agreements
Government securities . , . |
; — 104
Bankers’ a c ce p ta n ce s.... 43
Member bank borrowings----- — 14
Other loans, discounts, and
—
Total................
Member bank reserves
With Federal Reserve Banks.
(.'ash allowed as reserves§-----
4
;:»0
Excess reserves! .............................
Daily average level of member
bank:
Borrowings from Reserve Banks
Excess reserves§ ....................
Free reserves? ............. ..
—
!+
j
-
1
11
4
90
+
2
Net
changes
23
Sept.
— 64
4 819
;
-}- 11
4 - 42
— 522
4 118
— 31
—
15
4 224
— 77
— 17
30
. 233
4 - 51
4 - 110
—
o
4 - i5u
4
4 90S
— 397
4 2ns
81
ii
4 - 28
1
-■ 358 ; 4 - *53 j -1- 228
3
I —
3
— 242
8
—
— 253
— 135
4 29 j —
— 12 ' 4 sfi
+
4 184
— 131
4 688
— 475
— 323
4 189
4- 128
- f 520
— 3fi2
— 394
-}- 454
4 - 585
— 72
— 208
4
io
4 - 392
4 - 51
~~
4 - 359
—
2«>
4 - 163
i
'
4-
—
[
Total reserved .........................
Effect of change In requirod
1
i
I Sept.
|
I
89
4 - 21
18
llfi
—
16
1
4-
4-
i
93
2
4 - 158
4 ” t>0
4 513
— 198
4 - -’43
—
49
— 186
— 405
4 - 24
—
S3
-4- 109
— 126
4 . 108
— 174
—
815
3^
78
478
497
19
225
371
146
409
-179
70
\
STS
305
27 |
tm
<5
su n
108(1
«7||
Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t Includes assets denominated in foreign currencies,
i May also include redemptions.
5 These figures axe estimated.
Average for five weeks ended September SO, 19«4.
temporary reserve needs over the Labor Day holiday were
supplied largely through the purchase of Government
securities under repurchase agreements. Subsequently, as
movements in market factors began adding to the reserve
base, the System absorbed reserves through the effects of
the termination of outstanding repurchase agreements as
well as through outright sales of Treasury bills. In the
final week of the month the System again provided re
serves as an offset to the month-end absorption of reserves
by market factors. Over the five-week period as a whole,
the weekly average of System outright holdings of Gov
ernment securities rose by $228 million, while average
holdings of Government securities under repurchase agree
ments fell by $93 million. Average total System holdings
of bankers’ acceptances increased by $3Q million, From
FEDERAL RESERVE BANK OF NEW YORK
Wednesday, August 26, through Wednesday, September
30, System holdings of Government securities maturing in
less than one year fell by $117 million, while holdings
maturing in more than one year rose by $388 million.
TH E G O V E R N M E N T SEC U R IT IES M A R K E T
in the market for Government notes and bonds, the
hesitant atmosphere which had appeared in late August
remained in evidence in the early part of September. In
part, this cautious tone reflected some feeling that the
Federal Reserve System had permitted a slightly firmer
tone to develop in the money market. At the same time,
there was continued concern on the part of some partici
pants over the balance of payments and over the possible
implications for price stability of the automobile labor
negotiations and contract settlements, as well as some discussion of the likelihood of increased credit demands
stemming from the fall pickup in business activity.
Against this background, professional offerings expanded
somewhat and prices of notes and bonds generally receded
in the early part of September, with the largest losses oc
curring in the long-term maturity area. Offerings from
nonprofessional sources remained modest, however, and
some investment demand appeared at the lower price
levels. At the same time, professional offerings gradually
contracted as the technical position of the market strength
ened, and a steadier tone emerged toward midmonth. The
improvement in tone also reflected a renewed sentiment in
the market that long-term interest rates were likely to re
main relatively stable in the period immediately ahead. Al
though a consensus gradually developed that monetary pol
icy had shifted slightly, most participants felt that such a
move was aimed primarily at raising short-term rates and
would not have significant effects on long-term yields. The
feeling that rates in the longer maturity areas might remain
fairly stable was reinforced by press comments that the
Treasury’s refunding and new money needs over the com
ing year would be relatively modest. In this improved
atmosphere investment demand expanded, particularly for
high-coupon securities in the five- to ten-year maturity
category, while a good professional short-covering demand
also developed for notes and bonds of various maturities.
Accordingly, prices of most intermediate- and long-term
issues edged higher from September 16 through Septem
ber 22. Price movements thereafter were narrowly mixed.
At the close of the month, prices of Treasury notes and
bonds were generally 2/h lower to x%2 higher than end-ofAugust levels.
In the Treasury bill market, rates edged higher through
midmonth partly in response to seasonal pressures over
195
the quarterly corporate dividend and tax payment dates
and to additions to the regular weekly bill auctions.2 As
was the case in the bond market, the bill sector was in
fluenced during this period by market discussion of a pos
sible shift in monetary policy. Following the midmonth
tax date, bill offerings tapered off, demand increased some
what—particularly from commercial banks—and the tone
of the market strengthened. Against this background, bill
rates edged lower through September 18. During the re
mainder of the month rates edged irregularly higher as
dealers—faced by higher financing costs—attempted to
lighten their positions. Over the month as a whole, rates
on outstanding bills were generally 5 to 22 basis points
higher.
The September 24 auction of $1 billion of new oneyear bills resulted in an average issuing rate of 3.773 per
cent, compared with an average issuing rate of 3.688 per
cent on the comparable issue sold in August. At the last
regular weekly auction of the month held on September
28, average issuing rates were 3.555 per cent for the new
three-month issue and 3.711 per cent for the new sixmonth bill, 4 and 8 basis points higher, respectively, than
the average rates at the final weekly auction in August.
The newest outstanding three-month bill closed the month
at 3.55 per cent (bid), as against 3.50 per cent at the
end of August, while the newest outstanding six-month
bill was quoted at 3.72 per cent (bid) on September 30,
compared with 3.63 per cent at the close of the preceding
month,
O TH ER SE C U R IT IE S M A R K E T S
In the markets for corporate and tax-exempt bonds,
prices of new and seasoned issues were little changed in
quiet trading during the period immediately preceding the
September 7 Labor Day holiday. Subsequently, a cautious
atmosphere developed in both sectors in response to
some uncertainty over the posture of monetary pol
icy as well as to the usual September increase in the
calendar of scheduled corporate and tax-exempt issues.
Neither the more attractive pricing of new bonds nor some
price cutting on recent issues remaining on dealers’ shelves
sparked any significant expansion in demand, and prices
of new and seasoned issues generally edged lower through
midmonth. Toward the end of the month, however, the
improved atmosphere of several weeks’ duration in the
Government securities market began to influence the cor
porate and tax-exempt bond markets, and these markets
1 See this Review, September 1964, p. 176, for details.
MONTHLY REVIEW, OCTOBER 1964
196
firmed. A stronger tone was particularly evident in the
corporate sector where aggressive syndicate bidding for
new issues pushed reoffering yields down and stimulated
demand for higher yielding older issues still on dealers’
shelves. The corporate sector was also buoyed by the light
calendar of new corporate flotations on tap in the coming
weeks. In the tax-exempt sector, investor demand generally
expanded during this period following the very successful
marketing of a large housing authority bond issue. At the
same time, however, the tax-exempt sector continued to
be restrained by the large volume of dealer inventories,
and by a heavy calendar of forthcoming flotations.
Over the month as a whole, the average yield on Moody’s
seasoned Aaa-rated corporate bonds rose by 1 basis
point to 4.42 per cent, while the average yield on simi
larly rated tax-exempt bonds increased by 3 basis points
to 3.11 per cent. (These indexes are based on only a limited
number of issues.)
The volume of new corporate bonds floated in Septem
ber amounted to approximately $365 million, compared
with $170 million in the preceding month and $280 mil
lion in September 1963. The largest new corporate bond
flotation during the period consisted of $60 million of
45/s per cent utility company first and refunding mortgage
bonds maturing in 1994. The bonds, which were Aa-rated
by Moody’s, were reoffered to yield 4.53 per cent. They
were initially accorded only a fair investor reception but
sold out later in the month when the market atmosphere
brightened. New tax-exempt flotations in September totaled
approximately $850 million, as against $705 million in
August 1964 and $415 million in September 1963. The
Blue List of tax-exempt securities advertised for sale closed
the month at $673 million, compared with $611 million
on August 31. The largest new tax-exempt bond issue dur
ing the period was a $130 million Aaa-rated series of
housing authority bonds. Reoffered to yield from 2.05 per
cent in 1965 to 3.50 per cent in 2005, the bonds were
well received. Other new corporate and tax-exempt issues
floated in September were accorded mixed investor re
ceptions.
International M onetary and Financial D evelopm ents
TH E TO K Y O M E E T IN G OF
THE IN T E R N A T IO N A L M O N E T A R Y FU ND
The question of international liquidity and of future
world liquidity needs again dominated the annual meeting
of the International Monetary Fund (IMF), which this year
was held in Tokyo during the week of September 7.1 In
order to expand the Fund’s resources and thus strengthen
its ability to meet any contingencies that might arise, the
Fund’s governors agreed in principle on an increase of
members’ quotas. Several speakers suggested a 25 per cent
increase in most quotas, and there were also suggestions
that the quotas of Canada, Germany, and Japan might be
raised somewhat more than proportionately, in recognition
of the growing share of these three countries in interna
tional trade and payments. Individual quotas—which were
last raised in 1959 and currently total $15.6 billion—de
termine the limitations on the use of the Fund’s resources,
as well as the voting power, of each member country.
This year’s discussions were held against the back
ground of two studies of the international monetary sys
tem and international liquidity needs that were pre
pared by the IMF and the Group of Ten as a result of
resolutions taken at the Washington meeting of the IMF
last year.2 The discussions, which produced a thorough
analysis of the past performance and the likely evolution
of the international monetary system, showed a large
measure of agreement on the basic issues. It was generally
felt that the present gold exchange standard has served
past needs well and has contributed to an orderly expan
sion of international trade and finance. The several speak-
2 International Monetary Fund, Annual Report of the Executive
Directors for the Fiscal Year Ended April 30, 1964, Part II, and
Ministerial Statement of the Group of Ten, August 10, 1964. The
1 For a discussion of the 1963 meeting, see “The Question of In group consists of Belgium, Canada, France, Germany, Italy, Japan,
ternational Liquidity at the Fund Meeting”, this Review, November the Netherlands, Sweden, United Kingdom, and the United States,
with Switzerland an unofficial member.
1963, pp. 167-69.
FEDERAL RESERVE BANK OF NEW YORK
ers endorsed the conclusions of the study by the Group of
Ten, including those on the need for increases in IMF
quotas, multilateral surveillance of the present bilateral
liquidity arrangements, and coordination of monetary and
fiscal policies by the major Western nations. There also was
unanimity that the question of international liquidity is
closely related to the need for balance-of-payments disci
pline. Domestic inflationary pressures must be checked by
each country, and the provision of ample credit resources
should not be viewed as a substitute for national action to
correct payments imbalances.
Nevertheless, the delegates were aware of the possible
future liquidity requirements of an ever-expanding world
economy. In following up the studies of the past year,
therefore, both the IMF and the Group of Ten will ex
amine various proposals for the creation of additional re
serve facilities. It is clear that the problem is both
extremely important and difficult to resolve; there is a
wide range of proposed solutions, several of which may
have considerable merit. Hence, it is not surprising that
there should be some divergence of opinion on the appro
priate future course.
In his speech to the Governors of the Fund, Secretary
of the Treasury Dillon emphasized the need for con
tinuity and gradual evolution:
It is highly significant that both studies concluded
that the present system is functioning well and
that any changes should be designed, in the words
of the Fund report, “to supplement and improve
the system where changes are indicated, rather
than to look for a replacement of the system by
a totally different one”.
On the other hand, French Minister of Finance and Eco
nomic Affairs Giscard d’Estaing criticized the prominent
position of the key currencies in the present system and
favored a system in which gold v/ould constitute the core
of international liquidity, supplemented if necessary by
“deliberate and concerted creation of either reserve assets
or credit facilities”. British Chancellor of the Exchequer
Maudling rose to the defense of the gold exchange standard
and suggested that the future course of action should evolve
from it:
I prefer to build on what has stood the test of
time and experience, and has brought great bene
fits to the world. I know that some people ques
tion this, but I would not myself accept the views
of those who think that the imbalance in world
payments with which we have been faced has
197
been aggravated by the workings of the gold ex
change standard. I do not believe that the sources
of that imbalance lie solely in conditions of infla
tion in the deficit countries. Nor do I believe that
adjustments in domestic economic conditions
leading to improved international balance would
come about quickly and smoothly if only the role
of gold were strengthened, and if the only fresh
supply of owned reserves allowed in the principal
industrial countries in addition to gold was a
strictly limited amount of some new form of re
serve asset distributed to that restricted group of
countries on some uniform basis without regard
to their present payments position.
The fact that present provisions for world liquidity—•
including the various cooperative arrangements among the
central banks and treasuries of major industrial countries
—are deemed sufficient to meet foreseeable needs allows
time for careful and deliberate study of the various possible
alternatives. Meanwhile, abrupt and radical changes in the
institutional arrangements or the operating mechanism of
the international monetary system are clearly unnecessary.
R E C EN T E C O N O M IC PO L IC Y M E A S U R E S A B R O A D
During the second and third quarters of this year, in
flationary pressures continued to be the prime concern in
a number of industrial countries abroad.3 There were in
creasing signs that several countries which had initiated
anti-inflationary programs earlier were meeting with suc
cess in controlling the upward movement of prices. Never
theless, in many cases it was considered necessary to adopt
further restraint measures during the period under review.
In some countries, the lessening of inflationary pressures
was apparently accompanied by a slackening in what pre
viously had been very rapid advances of industrial activ
ity. National economic and monetary developments and
their interrelationships through the exchange markets and
balances of payments were the subject of continual inter
national consultation through the established channels of
cooperation.
g e n e r a l e c o n o m ic b a c k g r o u n d . The over-all pace of
economic activity remained vigorous in Continental Eu
rope during the first half of the year. In the Common
3 For a discussion of foreign economic and financial develop
ments during September 1963-March 1964, see “Recent Economic
Policy Measures Abroad”, this Review, April 1964, pp. 74-78.
198
MONTHLY REVIEW, OCTOBER 1964
Market countries, further economic expansion reflected
both a continued high level of consumer demand and a
higher rate of industrial investment and construction activ
ity than a year earlier. In January-May, industrial pro
duction advanced steadily—at an annual rate of 7 per cent
as against 11 per cent in 1963—and labor scarcities be
came more acute in most member countries. Consumer
prices continued to rise, but at a somewhat less rapid pace
than in 1963.
Individual countries within the Common Market ex
perienced somewhat divergent developments. In Belgium
and France, the rate of increase in industrial output dur
ing January-May was less than during the same period a
year earlier, while in Italy industrial production actually
decreased on a seasonally adjusted basis (see Chart I). In
Germany and the Netherlands, on the other hand, large
increases in consumer and investment demand led to fur
ther substantial advances in industrial output. France
and Italy succeeded in containing the increases in conChart I
INDUSTRIAL PRODUCTION !N MAJOR COUNTRIES
S e a s o n a lly a d ju ste d ; 1 95 3 = 10 0
Per cent
Pes cent
260 !--------------------------------- -- -----------------------1-------------------------------------------- 1260
J
F M A M J
J A
S O N D
1963
I
F M A M J
J A
S
1964
* Affected by widespread strike in the public sector.
Sources-. Organization for Economic Cooperation and Development, monthly statistic^
bulletins; notional statistics.
sumer prices during January-May to less than those reg
istered a year earlier. In the Netherlands, on the other
hand, large increases in wages and consumer purchasing
power resulted in an accelerated increase in consumer
prices (see Chart II).
Among the major industrial countries outside the Eu
ropean Continent, economic expansion continued at a
vigorous pace. In the United Kingdom, to be sure, the
growth rate of gross national product (GNP) fell from
the exceptionally high levels reached at the end of last
year; nevertheless, it was sufficiently high to draw into
the productive stream substantial amounts of remaining
unused resources of labor and equipment. Public and pri
vate fixed capital formation—especially in housing and
private manufacturing investment—made important con
tributions to the increase in total output. Industrial pro
duction, on the other hand, has remained steady since
January, reflecting a relatively small rise in consumer
expenditures and sluggish exports. The Canadian econ
omy, bolstered by large outlays on plant and equipment
and booming exports, is expected to grow this year by
about 7 per cent in terms of GNP. Japan’s growth con
tinued to exceed that of all other industrial countries, with
July industrial production 16 per cent above a year earlier.
As in 1963, rising economic activity this year again led
to high levels of imports, which contributed to the weak
current-account positions in the balances of payments of
some European countries. In contrast to last year, how
ever, the surpluses and deficits of some individual coun
tries tended to narrow. Italy’s trade deficit declined notice
ably during the first half of the year, a development which
contributed to the over-all improvement in the Italian
balance of payments. Germany’s trade surplus was less in
the second quarter than in either of the two preceding
quarters and continued to diminish further in July and
August. In the United Kingdom, the Netherlands, and
Denmark, however, a rise in imports, combined in the
case of the United Kingdom with sluggish exports, made
for the emergence of current-account deficits in the first
quarter.
In recognition of the mutual benefits to be gained from
coordinated efforts to achieve economic stability, the
Council of Ministers of the European Economic Commu
nity (EEC) in April drew up a common anti-inflationary
program aimed at the stabilization of prices and costs in
the EEC by the end of 1964. The program called for a
continuation of restrictive credit policies, but also empha
sized the need to complement credit policy with appro
priate fiscal measures. Thus, the program envisaged that
the rise in public expenditures be limited to 5 per cent per
annum and that, if necessary, taxes He raised to balance
FEDERAL RESERVE BANK OF NEW YORK
Chart II
CONSUMER PRICES IN MAJOR COUNTRIES
1953=100
Per cent
Per cent
u e iy iu n i
i
j
1101__L_i__1_J__1__!__ i__S__i__I__!__i__J__L_L _L_L_LJ__ L_J 110
J
F M A M J
J
1963
A S O N D J
F M A M J J A S
1964
So urces: O rg a n iza tio n for Econom ic Cooperation and D evelopm ant,
monthly statistical bulletins; n atio nal statistics.
budgets. In the event that a budget deficit should prove
unavoidable, it was recommended that the deficit be cov
ered by long-term borrowing. During the period under
review, the Common Market countries (as well as some
others) acted along the general lines of the EEC program.
ITALY, FRANCE, AND THE NETHERLANDS. In both Italy
and France, the principal aim of policy was to reinforce
previous restraint measures that were beginning to show
favorable results. The effects of the Italian anti-inflationary
program initiated last year were most apparent in an
improved trade balance. In the second quarter, Italian
imports were 1 per cent above a year earlier while ex
ports had increased by 18 per cent. The resulting
strengthening of Italy’s current account, combined with
a net inflow on capital account, reversed the previous
decline in official reserves and enabled the authorities
to repay in August $65 million of the $225 million
drawn from the International Monetary Fund in March.
This repayment liquidated Italy’s obligation to the Fund
by reducing the IMF’s holdings of lire to 75 per cent
of the Italian quota. During the first half of this year,
199
consumer prices increased somewhat less than a year
earlier, and bank loans and deposits decreased noticeably.
To be sure, economic expansion has also slowed down
considerably, with GNP advancing during the first quar
ter at an annual rate of only 2.4 per cent in real terms.
Against this background, the Italian authorities moved
to reduce further Italy’s trade deficit and to dampen pri
vate consumption and public expenditures, while at the
same time promoting industrial investment. In April, pay
ment terms for imports of a number of durable goods were
tightened, and measures to encourage exports were taken.
These included a cut in the stamp tax on export bills, ac
celerated reimbursement to exporters of the sales tax, and
a reduction in the premiums on export risk insurance.
Supplementary measures introduced at the end of August
were aimed at permitting increased manufacturing profits,
which had been squeezed by the rapid advance in wages.
A part of social security costs is henceforth to be financed
by general fiscal revenues rather than by direct employer
contributions. The general turnover tax is to be increased
from 3.3 per cent to 4 per cent on most goods to finance
the increased budgetary outlay. In other measures to en
courage investment, a 100 billion lire ($160 million) in
vestment fund is to be established to aid small and
medium-sized industries, and legislation is to be introduced
to allow the establishment of investment trusts. The
August measures also provide for increases in taxes on
middle and high incomes, and the Government stated its
intention to limit the annual increase in Government ex
penditures to 5 per cent.
French anti-inflationary measures likewise have shown
results. In January-August the French cost of living in
creased by about 1 per cent as against 3 per cent a year
earlier, while the money supply declined by 0.5 per cent
during the first five months, compared with a 2.5 per cent
increase a year earlier. Although the rate of increase
in over-all economic activity this year is expected to
match last year’s satisfactory results, private industrial
investment has fallen off and activity in some key indus
trial sectors weakened more than seasonally during the
summer months. The official over-all growth target for
1965, moreover, has been reduced below the 6 per cent
originally envisaged.
The French authorities took a number of steps to con
strain further public and private demand and to reinforce
credit restraint. Fiscal policy has been an important in
gredient in the French stabilization program. This year’s
budget deficit—planned from the start to be lower than
last year’s—is now believed likely to end up consider
ably less than originally estimated, and plans for a
balanced budget in 1965 were announced in September.
200
MONTHLY REVIEW, OCTOBER 1964
This goal is to be achieved by limiting the increase in
expenditures to 7 per cent. As regards monetary policy,
the 10 per cent ceiling on permissible annual increases in
bank credit was extended for another twelve months (to
September 1965). In a temporary move designed to ease
the midyear seasonal tightness in the money market and
thus to curb inflows of funds from abroad, the commer
cial banks’ required reserves in the form of cash, Treasury
bills, and medium-term paper were reduced in early sum
mer from 36 per cent to 33 per cent—a move that was
reversed by September. Within this over-all ratio, the por
tion to be held in the form of Treasury bills was reduced
from 13 per cent to 10 per cent, thereby enabling the
banks to use a larger part of their resources to grant
medium-term credit. To emphasize the point that there
was to be no relaxation in over-all credit restraint, the
authorities raised from 6 per cent to IV2 per cent the
penalty rate on bank borrowing from the Bank of France
exceeding 110 per cent of rediscount quotas. Further
more, the Bank of France reiterated its warning to the
commercial banks that increases in their lending by a rate
greater than 10 per cent a year might be penalized by a
reduction in their rediscount quotas at the central bank.
In an additional move toward tightening, the authorities
in June required consumer finance institutions to limit
their lending to eight times their own capital, as against
nine times previously.
In the Netherlands, the authorities also continued to re
inforce previously taken anti-inflationary measures. Buoy
ant consumer demand and a continuing labor shortage
were reflected in substantial price and wage increases
during the first five months of 1964 as well as in a de
terioration in the Dutch current account during the first
quarter. In January-June, imports rose 23 per cent and
exports 15 per cent over a year earlier. During the same
period, bank credit increased by more than 10 per cent
and persistently exceeded the ceilings set by the authori
ties. Therefore, in accordance with the gentleman’s agree
ment currently in force, the banks were obliged to make
noninterest-bearing deposits at the central bank equal to
the amounts by which they had exceeded the ceilings. In
the face of these developments, the Netherlands Bank on
June 4 increased its discount rate by Vi point to AV2 per
cent, the second such increase this year (see table); and,
to prevent banks from obtaining additional liquidity from
abroad, the Netherlands Bank ruled that after July 31 the
foreign liabilities of a bank must not exceed its foreign
assets by more than 5 million guilders ($1.4 million), un
less prior approval has been obtained from the authori
ties. To achieve a steady degree of restraint, bank credit
ceilings have been adjusted flexibly to changing seasonal
CHANGES IN FOREIGN CENTRAL BANK DISCOUNT RATES, 1964
In per cent
Country
Belgium .......................
Denmark .....................
Japan ...........................
Netherlands ...............
Sweden .........................
South Africa ...............
Switzerland .................
United Kingdom
Date
New rate
Change
July 3
June 11
March 18
January 6
June 4
January 31
July 15
July 3
February 27
4%
6>/2
6.57
4
4!/2
+ V4
+1
-{-0.73
41/2
4
21/2
5
+V4
+V4
-H/2
+Y 2
+1
demands for credit. During May-August, when the de
mand for credit is seasonally slack, bank lending was
limited to the average amount of credit outstanding in the
first half of 1963, while from September to the end of the
year an increase of 5 per cent above that level is per
mitted. In order to reduce consumer purchasing power,
taxes on cigarettes and gasoline were raised, and officially
controlled rents were increased by 10-12.5 per cent.
ANTI-INFLATIONARY MEASURES IN OTHER COUNTRIES.
In Switzerland, a high level of consumer and investment
demand, particularly in the building sector, sharply boosted
the demand for credit. Under an April agreement be
tween the Swiss National Bank and the commercial banks,
the growth of bank advances to domestic borrowers this
year is to be equal to only 79 per cent of the absolute
increase in 1961 or 1960 (whichever was higher), as
against last year’s permissible increase of 82 per cent of
the base period. The allowable increase in mortgage
loans, on the other hand, remained unchanged at 108 per
cent of the increase in the base year. Priority is to be
given to loans for residential building, agriculture, and
imports. Switzerland also created a capital issues com
mission to program the permissible total of new issues on
a quarterly basis. As of May 1, all new stock and bond
issues exceeding 5 million francs became subject to au
thorization by the commission. The buoyant demand for
bank credit—combined with previous measures to dis
courage the inflow of foreign funds, which had been an
important source of liquidity—caused a tightening in the
money and capital markets during the first half of the
year. By midyear, both short- and long-term rates stood
about % of a percentage point above a year earlier, and in
July the Swiss National Bank raised its discount rate to
2 V2 per cent from 2 per cent and its lending rate against
security collateral to 3 V2 per cent from 3 per cent. Further
more, in order to absorb bank liquidity by providing a
FEDERAL RESERVE BANK OF NEW YORK
domestic short-term investment instrument, the National
Bank in August sold a special issue of two-month Treasury
securities to the commercial banks. The Swiss authorities
also tightened consumer credit by increasing required
downpayments to 30 per cent from 20 per cent and shorten
ing the maximum repayment period to 2 years from 2 V2
years.
In Belgium, Germany, and Denmark the authorities
also acted to restrain credit expansion. This year’s vigor
ous business expansion in Belgium was accompanied by a
6 per cent increase in bank credit during January-May and
by a continued increase in prices. To counter these de
velopments, the Belgian National Bank in July raised its
basic discount rate from AVa per cent to 4% per cent
while tightening the eligibility requirements on the com
mercial paper it accepts for rediscounting. Also, the au
thorities used for the first time the powers granted under
the 1961 banking reform law to require commercial banks
to hold cash reserves with the central bank. Required re
serves were initially set at 1 per cent of the banks’ total
deposit liabilities. In Germany, commercial bank reserve
requirements on all types of deposits were increased
by 10 per cent as of August 1. (The demand deposit
ratio for large city banks, for example, rose from 13
per cent to 14.3 per cent.) At the same time, in order
to discourage the banks from meeting any increased
liquidity needs by borrowing abroad, the authorities an
nounced that the banks’ rediscount ceilings at the Ger
man Federal Bank would be reduced by an amount
equal to any increase in their borrowings abroad. In an
additional move to reduce domestic liquidity, the German
Federal Bank on July 13 improved the terms on which it
provides forward cover to commercial banks for invest
ment in United States Treasury bills. In Denmark, vigor
ous economic expansion led to a renewal of upward price
movements and a deterioration in the current account dur
ing the first quarter; and domestic liquidity—fed to a cer
tain extent by large public and private borrowing abroad
201
—increased rapidly, while bank credit expanded sharply.
Against this background, the National Bank of Denmark
on June 11 raised its discount rate from SV2 per cent to
6 V2 per cent. At about the same time the government
banned further long-term foreign borrowing by local au
thorities and public enterprises. As of October 1, the
National Bank imposed a penalty rate of 6 per cent, over
and above the 6 V2 per cent discount rate, on commercial
bank discounts from the central bank which are outstand
ing for more than twenty days in each quarter (thirty days
in the fourth quarter) and which exceed on the average 25
per cent of the borrowing bank’s combined capital and re
serves.
In the United Kingdom, the authorities acted to re
strain consumer spending somewhat. The 1964-65 bud
get, presented by the Chancellor of the Exchequer in
April, called for a 10 per cent increase in taxes on
tobacco and alcoholic beverages, which is designed to
yield an additional £100 million. At the same time, nonnegotiable savings instruments were made more attractive.
In this way, the authorities sought to curb the expected
budgetary deficit and to improve the prospects for its noninflationary financing.
In Japan, further measures were taken to control the
commercial banks’ foreign indebtedness and thus buttress
the tighter credit policy in force since late 1963. In July,
the Bank of Japan placed limits on the amounts of for
eign short-term funds Japanese banks are permitted to
accept. As of August, the central bank raised to 25
per cent from 20 per cent the ratio of liquid foreign
assets that commercial banks must maintain against their
short-term foreign liabilities. The previously imposed 35
per cent marginal ratio for foreign liabilities exceeding a
prescribed amount remains in effect, but now applies to
increases above the level of July 1964 instead of De
cember 1962. Also, in April, June, and September, the
authorities altered the suggested maximum rates commer
cial banks may pay on Euro-currency deposits.
202
MONTHLY REVIEW, OCTOBER 1964
Fiftieth A nn iversary of the Federal R eserve System *
N A M I N G O F R E S E R V E B A N K S A S T R E A S U R Y D E P O S I T O R I E S A N D FIS C A L , A G E N T S
Secretary of the Treasury McAdoo as being too rigid.
Thus, the final version of the bill left the amount and tim
ing of the transfer of funds up to the discretion of the
Secretary of the Treasury, thereby permitting him to con
tinue using the subtreasuries and national banks as de
positories. This earlier draft of the bill also appointed the
Federal Reserve Banks as fiscal agents, whereas the final
act authorized the Secretary of the Treasury to require the
Banks to act as fiscal agents at his discretion. In actual
fact, the Secretary of the Treasury began using the new
Reserve Banks as depositories in 1915 and as fiscal agents
in January 1916.
At first, the fiscal services performed by the Reserve
Banks were limited to receiving deposits of Government
collectors of customs and internal revenue and to paying
checks and warrants drawn upon the United States Treas
ury. However, after the United States entered World War
I, Secretary McAdoo turned to the Reserve Banks for
other services. In particular, the Banks were authorized
to sell, issue, exchange, and convert Liberty bonds, and
they became the focal points for local Liberty Loan com
mittees, which made a vital contribution to the financing
of the war.
Another useful service performed by the Federal Re
serve Banks was the transfer of money around the country
by wire and bookkeeping entries. This procedure—made
possible through the deposit of gold and gold certificates
by each Reserve Bank in the gold settlement fund in
Washington—eliminated the necessity for expensive ship
ments of coin and currency between subtreasuries.
It soon became evident that the Reserve System could
perform many of the fiscal agency functions at least as
efficiently as subtreasuries, and that having both was an
unnecessary expense. In May 1920, therefore, Congress
passed a bill directing the discontinuance of the nine subtreasuries on or before July 1, 1921. The Secretary of the
Treasury proceeded to carry out this task by transferring
many of the remaining fiscal agency functions from the
subtreasuries to the Reserve Banks. The last subtreasury,
* The tenth in a series of historical vignettes appearing during the located in Cincinnati, was closed on February 10, 1921.
System’s anniversary year.
The authors of the Federal Reserve Act were aware
that the methods employed in managing the Treasury’s
finances had serious defects. Many of the Government’s
fiscal affairs were handled by the Independent Treasury
System, which had been established in 1846 to provide
places other than private banks for the safekeeping of
Government funds. The defects of that system had been
described in a study published by the National Monetary
Commission.
Most of the Treasury’s revenues from customs and
taxes were collected in currency and coin, and it was
Treasury practice during most of the pre-Worid War I
period to hold this money in the subtreasury offices lo
cated around the country until it was needed for disburse
ments. Hence, when Treasury receipts exceeded dis
bursements and the surplus was held in the subtreasury
vaults, money in circulation declined. Since currency and
coin were also an important component of bank reserves,
its withdrawal from the banks contracted the reserve base,
and there was no central banking mechanism through
which this effect could have been offset at times when re
serve withdrawals were inappropriate in the light of cur
rent economic developments.
Successive Secretaries of the Treasury had attempted
on occasion to relieve undesirable contractions of the
bank reserve base by transferring funds from the sub
treasury to the national banks, which had been used as
depositories since the passage of the National Banking
Act. These attempts were only partially successful. The
establishment of the Federal Reserve System itself was,
of course, a major step in combating this and other in
flexibilities in the country’s money and banking structure.
An early version of the Federal Reserve bill required
that all general funds of the Treasury be deposited in the
Federal Reserve Banks within twelve months after passage
of the act. This provision was successfully opposed by
@FedFRASER